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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at MingZhu Logistics Holdings (NASDAQ:YGMZ) and its ROCE trend, we weren't exactly thrilled.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on MingZhu Logistics Holdings is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.043 = US$1.5m ÷ (US$45m - US$10m) (Based on the trailing twelve months to June 2021).
Therefore, MingZhu Logistics Holdings has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Transportation industry average of 12%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of MingZhu Logistics Holdings, check out these free graphs here.
What Does the ROCE Trend For MingZhu Logistics Holdings Tell Us?
On the surface, the trend of ROCE at MingZhu Logistics Holdings doesn't inspire confidence. To be more specific, ROCE has fallen from 40% over the last three years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
On a related note, MingZhu Logistics Holdings has decreased its current liabilities to 23% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
What We Can Learn From MingZhu Logistics Holdings' ROCE
In summary, we're somewhat concerned by MingZhu Logistics Holdings' diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 80% over the last year, so investors are recognizing these changes and don't like the company's prospects. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know more about MingZhu Logistics Holdings, we've spotted 6 warning signs, and 2 of them are a bit concerning.
While MingZhu Logistics Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.